September 21, 2022 - This week, almost 750 people joined a compelling webinar hosted by the LSTA focusing on the recent decision by the US Court of Appeals for the 2nd Circuit (“2nd Circuit”) regarding the $900MM mistaken payment under the 2016 Revlon credit agreement. LSTA General Counsel Elliot Ganz moderated and was joined by Ronald Mann and Eric Talley, two prominent professors from Columbia Law School, each of whom drafted amicus briefs in this case supporting the position that the mistaken payments should be returned.
Background. The panel began with a brief review of the salient facts. On August 11, 2020, Citibank, as agent under a 2016 credit agreement to Revlon, and as part of a contentious series of “liability management” transactions by Revlon and several of the lenders, intended to make an interest payment to the 2016 lenders in the amount of $7.8 million. Instead, and despite a so-called “six-eye” operations procedure designed to prevent mistakes, they made instead a payment of about $900MM, a number that matched, to the penny, the amount of interest and principal owing on the 2016 loan.
Citi discovered the mistake the next day and sent recall notices to the lenders explaining that a mistake had been made and began asking for the return of the principal payments. Over the next few days several of the lenders returned the money but others did not. On August 17, 2020, Citi started filing lawsuits against the non-returning lenders bringing claims for unjust enrichment, conversion, money had and received and payment by mistake.
In December 2020, the district court in New York held a bench trial and, in February 2021, ruled that the lenders were entitled to keep the funds mistakenly paid. Judge Furman held that the defendants had established the elements of the “discharge-for-value” defense. Citi appealed to the 2nd Circuit. Briefs were filed and oral argument was heard in September 2021. In early September, the 2nd Circuit reversed and remanded the case.
The District Court Decision. Professor Mann followed with a brief review of the District Court’s decision to allow the lenders to keep the mistaken payment. Judge Furman, in a 101-page decision, held that the lenders had a valid defense under New York’s “discharge for value” doctrine. He concluded that the lenders did not have “constructive notice” of Citibank’s mistake at the moment they received the transfers.
The 2nd Circuit Decision: constructive notice. Professor Talley then addressed the first part of the court’s decision, the ruling that the lenders did, indeed, have constructive notice of the mistake. The court concluded that the lenders were on “inquiry notice” of the mistake. i.e., the facts “were sufficiently troublesome that a reasonably prudent investor would have made reasonable inquiry, and reasonable inquiry would have revealed the payment was made in error”. The court pointed to several “red flag warnings” that something was amiss such as the absence of prior notice, the obvious insolvency of the borrower, and the fact that the 2016 loan was trading at a very steep discount (20-30% of par) so Revlon would have been much better off purchasing the loan in the open market.
The 2nd Circuit Decision: entitlement. Professor Mann explained the court’s second grounds for reversing: In contrast to the district court’s view that the exchange for value defense was available notwithstanding the lack of a present entitlement, the 2nd Circuit held that the defense could not rely on that defense because they were not entitled to the money. In contrast to the precedent on which the lenders relied, i.e., Banque Worms, where the maturity date had passed, repayment of the Revlon loan was not due for another three years.
The Concurrence. Both panelists then weighed in on Judge Park’s 30-page concurrence. Judge Park concurred with the court’s judgment but argued that the opinion was overcomplicated. Instead, he argued, the case was much simpler and more straightforward. In a nutshell, “a recipient of mistakenly transferred funds cannot invoke the discharge-for-value defense…unless and until it has a present entitlement against the debtor. Put simply, you don’t get to keep money sent to you by mistake unless you’re entitled to it anyway.” Judge Park did not disagree with the court’s detailed analysis; instead, he would have reached the same result more directly by applying basic principles of unjust enrichment.
Judge Leval’s Extraordinary Addendum. In an action rarely seen in appellate jurisprudence, Judge Leval added an addendum to his decision (not joined by Judge Sack or the court). First, he questioned whether the type of accidental payment made by Citibank even comes within the scope of the discharge-for-vale rule (a position not offered or briefed by Citibank and one that is beyond the scope of this article). Second, he took responsibility for the long time it took (almost a year since oral argument) to produce the judgment. He explained that initially he and Judge Sack determined to “certify” the question to the New York Court of Appeals and he wrote a draft opinion to that effect. The two judges then decided against certification “primarily because certification ordinarily results in at least a year’s further delay and because we became increasingly persuaded, despite initial uncertainties, that the law of New York law…favors Citibank’s position”. Professor Talley speculated that perhaps Judge Park’s concurrence was initially a dissent to the decision to certify and that it was Judge Park’s proposed dissent that spurred the change of heart.
What’s next. The panel next turned its attention to what comes next. All agreed that this case is not the type that would be taken up on appeal by the US Supreme Court. It involves state, rather than federal, law issues and (consequently) is not susceptible to a circuit split. The other option for the lenders is to request en banc review by the entire 2nd Circuit. The panelists all agreed that it was unlikely that the court would consider en banc review since the judgement was unanimous and Judge Leval is widely viewed as the court’s contracts guru. Thus, if the decision is not appealed, or if the appeal for en banc review is rejected, the case would be remanded to the District Court who would then, presumably, require that the mistaken payments be returned to Citibank.
The Revlon Bankruptcy. The panel briefly focused on what impact the 2nd Circuit’s decision might have on the ongoing Revlon bankruptcy proceedings. Assuming the mistaken payment proceeds are returned to Citibank, the lenders in the litigation would become claimants in the bankruptcy and the issue of the status of a potential Citibank claim would be mooted.
What Happens to the LSTA’s Erroneous Payment Provision? Following the district court’s decision, most banks began inserting language into their credit agreements that would assure the return of mistaken payments in most circumstances. The LSTA, through its Primary Markets Committee, quickly developed market standard provisions. As Professor Talley confirmed in his recent research paper, those provisions have been very widely adopted by the loan market. The panelist predicted that, notwithstanding the 2nd Circuit’s decision, those provisions were very unlikely to go away.
Replay and materials. A replay of the webinar and all of the associated materials (The opinion, concurrence, the LSTA amicus brief, the Legal Professors’ amicus brief, and Professor Talley’s research paper on mistaken payment provisions) are available here.